Consumer Price Index: Inflation Differs for Seniors

Friday

Dec 21, 2012 at 2:42 AM

Conservatives argue that Washington never cuts programs, it just increases spending on them more slowly than planned. But to recipients of federal benefits, that type of "cut" can seem just as painful.

Excerpted from an editorial by the Los Angeles Times:

Conservatives argue that Washington never cuts programs, it just increases spending on them more slowly than planned. But to recipients of federal benefits, that type of "cut" can seem just as painful.

That's why there is an intense battle looming over a proposal to reduce the cost-of-living adjustments applied to numerous federal programs, including Social Security. The change is billed as a more accurate way to calculate the effects of inflation. ...

Both President Barack Obama and House Speaker John A. Boehner, R-Ohio, have embraced a new version of the Consumer Price Index that's designed to do a better job accounting for how people respond to changes in prices. The switch to "chained-CPI" would trim the annual cost-of-living adjustment slightly, reducing Social Security and other federal benefit payments by more than $100 billion over 10 years. It would also generate billions more in tax revenue by slowing the rate at which tax brackets are adjusted for inflation. ...

TRYING TO MEASURE ACCURATELY

Economists have grumbled for decades that the CPI overstates the real increase in the cost of living, in part because it assumes that the only way consumers react to changes in prices is to switch between more and less expensive versions of the same product. It doesn't consider how consumers change what they put into their shopping baskets in the face of rising prices by, for example, replacing meat with pasta. The "chained" approach to CPI factors in changes in the shopping basket as well as the price of the items therein to reflect more accurately the products people are actually buying.

The problem with applying the new measure to Social Security benefits is the surveys used to calculate the CPI measure the buying habits of the broad U.S. population. Social Security recipients spend a larger portion of their income on healthcare, and those costs have been rising disproportionately fast. The Bureau of Labor Statistics has an experimental version of CPI for the elderly that reflects these higher costs, but it's based on a sample too small and generic to provide the basis for a truly accurate version of the price index for seniors. ...